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    04 Supply Contract

    Uploaded by

    PAUL

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    04 Supply Contract

    Uploaded by

    PAUL
    3 views12 pages

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    © © All Rights Reserved

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    3 views12 pages

    04 Supply Contract

    Uploaded by

    PAUL

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    Supply Contract

    ISOM3770 Tutorial

    1
    The Current Situation
    Fixed Production Cost =$100,000

    Variable Production Cost=$35

    Wholesale Price =$80

    Selling Price=$125
    Salvage Value=$20

    Manufacturer Manufacturer DC Retailer

    Note: The manufacturer makes-to-order and bears no


    risk, the retailer bears all the risk in this supply chain
    Customers

    2
    Demand Scenarios
    Q Probability for Cumulative
    Demand Scenarios D=Q Probability for D ≤ Q
    8000 0.11 0.11
    30% 10000 0.11 0.22
    Probability

    25% 12000 0.28 0.5


    20% 14000 0.22 0.72
    15% 16000 0.18 0.9
    10% 18000 0.1 1
    5%
    0%

    Sales

    3
    Retailer Expected Profit
    Expected Profit

    500000

    400000

    300000

    200000

    100000

    0
    6000 8000 10000 12000 14000 16000 18000 20000
    Order Quantity

    4
    Supply Contracts (cont.)
    • Retailer optimal order quantity is 12,000 units
    Cu = 125 – 80 = $45, Co = 80 – 20 = $60,
    Critical Fractile = Cu / (Cu + Co) = 45 / (45 + 60) = 0.4286, Cumulative Probability for D ≤ 12000 = 0.5.

    • Retailer expected profit is $470,700


    (125*8,000 – 80*12,000+20*(12,000 – 8,000))*0.11 + (125*10,000 – 80*12,000 + 20*(12,000 – 10,000))*0.11 +
    (125 – 80)*12,000*(0.28 + 0.22 + 0.18 + 0.1) = $470,700

    • Manufacturer profit is $440,000


    (80 – 35)*12,000 – 100,000 = $440,000

    • Supply Chain Profit is $910,700


    470,700 + 440,000 = $910,700

    5
    Buy-Back Supply Contracts
    Fixed Production Cost =$100,000

    Variable Production Cost=$35

    Wholesale Price =$80

    Selling Price=$125
    Salvage Value=$20

    Manufacturer Manufacturer DC Retailer

    Buy-back price of unsold units= $55


    Customers

    6
    Buy-Back Supply Contracts (cont.)
    • Retailer optimal order quantity is 14,000 units
    Cu = 125 – 80 = $45, Co = 80 – 55 = $25,
    Critical Fractile = Cu / (Cu + Co) = 45 / (45 + 25) = 0.6429, Cumulative Probability for D ≤ 14000 = 0.72.

    • Retailer expected profit is $513,800


    (125*8,000 – 80*14,000 + 55*(14,000 – 8,000))*0.11 + (125*10,000 – 80*14,000 + 55*(14,000 – 10,000))*0.11
    + (125*12000 – 80*14000 + 55*(14000 – 12000))*0.28 + (125 – 80)*14000*(0.22 + 0.18 + 0.1) = $513,800

    • Manufacturer profit is $471,900


    (80 – 35)*14,000 – 100,000 – (55 – 20)*(14,000 – 8,000)*0.11 – (55 – 20)*(14,000 – 10,000)*0.11 – (55 –
    20)*(14,000 – 12,000)*0.28 = $471,900

    • Supply Chain Profit is $985,700


    513,800 + 471,900 = $985,700

    7
    Revenue-Sharing Supply Contracts
    Fixed Production Cost =$100,000

    Variable Production Cost=$35 Wholesale Price =$60


    instead of $80

    Selling Price=$125
    Salvage Value=$20

    Manufacturer Manufacturer DC Retail

    The retailer provides 15% of Customers


    revenue as a return

    8
    Revenue-Sharing Supply Contracts (cont.)
    • Retailer optimal order quantity is 14,000 units
    Cu = 125 – 60 = $65, Co = 60 – 20 = $40,
    Critical Fractile = Cu / (Cu + Co) = 65 / (65 + 40) = 0.6190, Cumulative Probability for D ≤ 14000 = 0.72.

    • Retailer expected profit is $504,325


    (125*(1 – 0.15)*8,000 – 60*14,000 + 20*(14,000 – 8,000))*0.11 + (125*(1 – 0.15)*10,000 – 60*14,000 +
    20*(14,000 – 10,000))*0.11 + (125*(1 – 0.15)*12000 – 60*14000 + 20*(14000 – 12000))*0.28 + (125*(1 – 0.15) –
    60)*14000*(0.22 + 0.18 + 0.1) = $504,325

    • Manufacturer profit is $481,375


    (60 – 35)*14,000 – 100,000 + 125*0.15*8,000*0.11 + 125*0.15*10,000*0.11 + 125*0.15*12000*0.28 + 125*
    0.15*14000*(0.22 + 0.18 + 0.1) = $481,375

    • Supply Chain Profit is $985,700


    504,325 + 481,375 = $985,700
    9
    Under Vertical Integration…
    Fixed Production Cost =$100,000

    Variable Production Cost=$35

    Wholesale Price =$80

    Selling Price=$125
    Salvage Value=$20

    Manufacturer Manufacturer DC Retailer

    Customers

    10
    Under Vertical Integration… (cont.)
    • Optimal order quantity is 16,000 units
    Cu = 125 – 35 = $90, Co = 35 – 20 = $15,
    Critical Fractile = Cu / (Cu + Co) = 90 / (90 + 15) = 0.8571, Cumulative Probability for D ≤ 16000 = 0.9.

    • Supply Chain Profit is $1,014,500


    (125*8,000 – 35*16,000 + 20*(16,000 – 8,000))*0.11 + (125*10,000 – 35*16,000 + 20*(16,000 – 10,000))*0.11
    + (125*12,000 – 35*16,000 + 20*(16,000 – 12,000))*0.28 + (125*14,000 – 35*16,000 + 20*(16,000 –
    14,000))*0.22 + (125 – 35)*16,000*(0.18 + 0.1) – 100,000 = $1,014,500

    11
    Supply Contracts

    Strategy Retailer Manufacturer Total


    Sequential Optimization 470,700 440,000 910,700
    Buyback 513,800 471,900 985,700
    Revenue Sharing 504,325 481,375 985,700
    Global Optimization 1,014,500

    12

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